With college prices at an all-time high, more and more families are saving up to help chip away at those costs. According to Sallie Mae's latest national study, 57% of American parents are currently saving for college -- a figure that's up 9 percentage points from the previous year.
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So just how much is the average American saving for college? According to Sallie Mae, the average family has socked away $16,380, with 37% of savers using tools such as 529 plans to help meet their goals.
Fidelity's numbers are a bit different -- and actually a bit more promising. The investment giant estimates that 72% of families are now saving for college, with 41% taking advantage of 529 plans. And according to the College Savings Plan Network, the average family with a 529 has a balance of close to $21,000, which is actually a record high. But while those numbers may sound promising, the average American hoping to make a more sizable dent in those college bills still has some serious catching up to do.
The costs just keep climbing
With college expenses rising faster than inflation, even strong savers struggle to bear the entire cost of higher education. Here's what college tuition cost, on average, for the 2015-2016 school year:
- $9,410 for a public four-year in-state college
- $23,893 for a public four-year out-of-state school
- $32,405 for a private nonprofit four-year college
But as we all know, tuition doesn't always tell the whole story. Here's an estimate of what the entire college package cost for the 2015-2016 school year, from tuition to fees to room and board:
- $19,548 for a public four-year in-state college
- $34,031 for a public four-year out-of-state college
- $43,921 for a private nonprofit four-year college
This means that the average American family with $16,380 saved for college couldn't even cover a full year of tuition, fees, and room and board at a public four-year in-state school. Furthermore, the average saver using a 529 plan only has enough money to pay for about a year at a public in-state college, when you consider the whole package.
But there's a silver lining here, especially if college isn't quite around the corner. If you commit to saving consistently and employ smart strategies, you can grow that balance so that when college does roll around, you'll be in a stronger position to foot the bill.
The drawbacks of savings accounts
Standard savings accounts are a poor choice for families hoping to pay for college, just as they're a bad place to house your retirement fund. The problem with savings accounts is that they offer an extremely low return compared to most other investment options. In fact, the only thing they really have going for them is that they're probably the safest option out there. Unless you've socked away more than $250,000 per depositor, you don't risk losing your principal when you stick your money in a savings account. What you do risk losing out on, however, is investment growth.
The average savings account today pays roughly 1% interest. A 529 plan, by contrast, might easily give you a 5% return even when you factor in the fees that come along with it. Let's say you manage to save $200 a month over the course of 10 years. At 1% interest, your ending balance will be about $25,000. But if you invest in a 529 plan that generates an average annual 5% return, in 10 years, you'll have $30,000.
If you're not sold on a 529, there are several alternatives to consider. Municipal bonds, for example, are popular among some savers, because they typically come with a relatively small amount of risk and offer tax-free interest. You might also consider opening up a Roth IRA, which can double as a retirement and college-savings tool, if you meet the income requirements to do so.
Start as early as possible
Another way to increase your chances of meeting your college savings goal is to start putting money away as early as possible -- perhaps before your children are even born. Imagine you're able to set aside $200 a month for college. Here's what your ending balance might look like depending on how early you start:
Calculations and table by author.
As you can see, the more time you give yourself to save, the more sizable a college fund you'll amass.
Paying for college is a major undertaking, and it's something a lot of families don't manage to do -- so give yourself credit for saving, whatever amount you manage to accumulate. With any luck, it'll go a long way when the time comes to use it.
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